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01/11/2006

The Walled Garden “Hit List”

In my last post on this topic I discussed how search and entities such as Google Base will put tremendous pressure on many of the Internet’s “walled gardens”, in this promised follow-up I examine some of the specific “gardens” that are most at risk.

In yet another priceless scene from Monty Python’s Holy Grail, a group of French Knights, after being informed by King Arthur that he intends to take their castle by force, listen intently to ominous (and somewhat silly) sounds emanating from a nearby forest.  The sounds appear to indicate that a massive siege machine is being constructed behind the trees, but rather than race around preparing for the inevitable assault, the French just listen, as if transfixed by the sounds of their own impending doom.

Much like the French knights, today’s “walled gardens” have also been similarly, although indirectly, warned by the big search engines. Indeed, it would seem as though with each passing week the drumbeat of ominous sounds emanating from “search forest” is getting louder and louder, yet most walled gardens do not appear concerned.  By themselves, initiatives such as Google Base, directed search, RSS feeds, and structured blogging, do not represent a “killer blow” to walled gardens, but taken as a whole they clearly have the potential to cause major damage.

Just how vulnerable a particular walled garden is to the coming assault depends on three key factors:

  1. Content Availability: Generally speaking, the more “self published”, publicly index-able data there is, the more vulnerable the walled garden.  As I mentioned in my prior post, 10 years ago very few people/businesses had their own web site.  Today, the situation is dramatically different with most businesses and an increasing number of people having their own sites.  Almost all of these sites are not password protected and can therefore be fully indexed by search engines.   If a Walled Garden is charging to distribute or provide access to data that can now be easily aggregated from “self published” web sites, it is in an increasingly tenuous position.
  2. Index Affinity: The more willing a data owner is to make their data available for indexing, the more tenuous the walled garden’s business.  In most cases data owners are quite content to disseminate their information as widely as possible, however there are some cases where limited distribution of data is preferable.   
  3. Process Simplicity:  Walled gardens can create value by not only aggregating and displaying data, but also by providing a process for acting on that data.    The more complex the process, the more value the garden is adding to the overall transaction.  Conversely, if a garden has a highly simplistic process where it simply displays aggregated information, it is highly vulnerable to search led attacks.

Given these three factors, I thought it might be intellectually provocative to assess just how vulnerable some of the biggest “walled gardens” are to search-led assault.

This potential “hit list” includes:

Homestore (HOMS)
Description:  Homestore.com’s main business is operating Realtor.com, the biggest real estate listing site on the Internet. Realtor.com is official site of the National Association of Realtors and has a direct connection into the NAR’s Multiple Listing Service (MLS) which has for some time been the database “of record” in the residential real estate industry.  Homestore also operates sites with apartment and new home listings.
Content Availability:  Very high.  Almost every real estate agent now operates their own site independent of Homestore/Realtor.com.  What’s more, these sites tend to offer richer content with longer descriptions and more pictures than Homestore/Realtor.com.
Index Affinity:  Very high.  Sell side realtor’s (and owners) want the widest possible distribution of their listings.
Process Simplicity:  Very high.  Homestore/Realtor simply aggregates and displays listings and offers no real process other than basic search. 
Comments: Homestore/Realtor.com appears particularly vulnerable to attack.  It is quite possible that search engines can create not just a similar but a superior site thanks the large amount of high quality content that is readily index-able and the crazy realtor-friendly data restrictions that Homestore abides by.  Thanks to the NAR affiliation, search won’t put Reator.com out of business, but it will put tremendous pressure on its current business model.

Monster Worldwide (MNST)
Description:  Monster Worldwide is the largest job and resume listing site on the Internet. Monster charges employers to either post open jobs or search their database of resumes.  Consumers are allowed to search the site for jobs and post their resumes for free.
Content Availability:  Very High/Very Low.  Availability of job listings on individual company sites is quite high as evidence by new competitors such as SimplyHired.  However, availability of consumer resumes is very low.  Few, if any, consumers currently publish a formal resume on their own websites.
Index Affinity:  Very High/Medium.  Employers want (and in many cases the law requires) wide distribution of their job listings.  On the resume front, while consumers want their resumes distributed, many don’t want them distributed too widely for privacy reasons.
Process Simplicity:  High/High.  Monster really just aggregates and structures job postings and resumes.  They do have some value added processes that enable consumers to quickly apply for a job and more efficiently match companies and prospective employees, but most of the time the next step in the process is just a phone call/e-mail.
Comments: Monster is interesting in that one part of its business (job postings) is clearly very vulnerable in the short term, while the other (resume listings) is not.  They will likely have to figure out ways to leverage their resume franchise to protect their job listings.

EBay  (EBAY)
Description:  EBay is the world’s largest online auction site.  EBay has also been aggressively moving into the pure classified space by purchasing properties such as Rent.com.  While many people think of Ebay as an auction site, almost 1/3 of its items are now sold via its “Buy It Now” feature which operates more like a traditional store. 
Content Availability:  Low to Medium.  Unlike jobs or houses, it currently makes no sense to list an item for auction on a personal or company website given that there is little chance that a personal site will attract a large number of potential buyers.  However, there are lots of items on the web for sale at a fixed priced.
Index Affinity:  High. Like most sellers, EBay’s sellers want the largest possible audience for their items and so are quite open to any marketing strategy that could increase their sales.  Individual E-Commerce sites are increasingly letting their inventory be indexed for exactly this purpose.
Process Simplicity:  Low.  Facilitating an auction is a complex process, especially compared to something like listing a job or house.   EBay tries as hard as it can to stay out of the process, but still is much more involve than the average walled garden.
Comments: While EBay’s pure auction business seems fairly well insulated from search-led attacks, the “Buy it Now” business seems much more vulnerable.  The merchants that sell via the “Buy it Now” button are really just using EBay as a distribution channel and, would likely rather sell direct to customers via their own e-commerce website than pay EBay their commission if they had a lower cost option.  The issue then comes down to whether or not EBay is a cheaper distribution channel than search.  To date, my anecdotal conversations with many online sellers indicate that search is, net net, a cheaper channel but the difference is narrowing as the cost of search words increases.  This equation would be blown apart though if Google were to index,structure and present e-commerce items for free, as opposed to the flawed Froogle/Dealtime/Shopping.com model it currently uses.  Ebay’s recent foray into classified ads, such as Rent.com, seems especially ill-timed as they would appear to have the same vulnerabilities as Homestore.

Match.com  (part of IACI)
Description:  Match.com is the largest online dating site.  Users submit profiles and pay monthly subscription fees to contact each other. 
Content Availability:  Low. While an increasing number of potential Match.com customers have their own web page at places such as MySpace.com or Facebook.com. the idea of posting one’s dating profile on one’s homepage (at least overtly) has not yet really taken off.  This will change over the long term, but there’s no readily available content for the search engines to index right now.
Index Affinity:  Low to Medium.  People looking for a prospective mate usually want to maintain a modicum of discretion in their endeavors and thus are probably not going to be wild about random search engines indexing their personal details and then broadcasting them to the world.   That said, if they had control over which engines indexed them people might be more inclined to participate.
Process Simplicity:  High.  As currently structured online dating sites offer a very simple process: search, look, e-mail. Some try to distinguish themselves by offering a screening or qualification process (such as a personality test), but most are really just glorified “personal” sections.
Comments: Online dating sites, such as Match.com, seem relatively safe from the Google’s of the world in the near term thanks to the lack of index-able content and the need for discretion.  The real threat to the online dating sites is coming from the social networking sites which should seize a large piece of the dating market from the current walled gardens over time.

Fight Them or Join Them?

While some of the walled gardens are well and truly doomed, others still have time to respond before the search-led assault commences.  Responses can (and should) vary.  The most radical option would be for the walled gardens to tear down their walls and try to beat the search engines to the punch by launching their own vertical search plays.  The gardens are highly unlikely to do this though because it would result in massive near term revenue and margin disruptions.  Another strategy might be to buy some of the independent “vertical search” players targeting their specific market niche and then operate them as a separate business.  This way they can hedge their bets and cover both bases.  A third strategy might be to merge with some of the existing search players in advance of their entry.  This could make sense for both players as it would assure continued domination of the particular market niche, however it may be hard to make the numbers work.

Whatever the case, those sounds emanating from “search forest” are not the sounds of a giant wooden rabbit being built, but of a kick-ass, take-no-prisoners structured search machine.  The walled gardens would be wise to get off the wall and starting preparing for the inevitable assault.

January 11, 2006 in Internet | Permalink

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The thoughts and opinions on this blog are mine and mine alone and not affiliated in any way with Inductive Capital LP, San Andreas Capital LLC, or any other company I am involved with. Nothing written in this blog should be considered investment, tax, legal,financial or any other kind of advice. These writings, misinformed as they may be, are just my personal opinions.